Depth of Zimbabwe’s Capital Markets: Expanding Opportunities and Challenges

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The Victoria Falls Stock Exchange (VFEX) is set to enhance its offerings by introducing contract for differences (CFDs) trading, raising questions about the depth of Zimbabwe’s capital markets.

By Tawanda Musarurwa

CFDs are financial derivatives that allow traders to speculate on the price movements of assets without owning the underlying assets.

The VFEX, a US dollar-denominated bourse, is partnering with international brokerage firm VCG Markets to offer local investors access to international markets, including stocks, indices, foreign currencies, and cryptocurrencies.

VCG Markets’ operations and business development manager, Johnny Nassar, highlighted that this would not be the first instance of local investors accessing international markets. Until 1984, shares listed on foreign bourses were available on the Zimbabwe Stock Exchange (ZSE).

Although foreign currency and cryptocurrency derivatives trading has grown in Zimbabwe, it has predominantly occurred on unregulated and dubious platforms. The introduction of CFD trading adds another layer to local capital markets, which have seen various changes in recent years.

State of Zimbabwe’s Capital Markets

The Securities and Exchange Commission of Zimbabwe (SECZ) reported that by the end of last year, the country had 215 institutions in the capital markets, comprising three registered exchanges: ZSE, VFEX, and the Southern Africa Mercantile Exchange, which was licensed in 2023 but is yet to operate. A fourth exchange, the Financial Securities Exchange (Private) Limited (Finsec), holds an alternative trading platform (ATP) license.

As of December 2023, Zimbabwe had 22 securities dealings firms, up from 21 in 2022. The country also had 32 licensed asset management firms and 63 licensed financial advisers. The fastest-growing sub-sector in the local capital markets is collective investment schemes, which numbered 81 by the end of 2023.

SECZ CEO, Anymore Taruvinga, attributed this growth to the broadening of tradable financial assets in the country. “We have seen increased appetite from asset management firms to register exchange-traded funds (ETFs), real estate investment trusts (REITs), and other types of collective investment schemes,” he said. He noted that the introduction of General Notice 469 of 2020 enabled new types of investment schemes, such as REITs, ETFs, private equity funds, commodity funds, venture capital funds, and warehouse receipts.

Zimbabwe currently has two REITs: Terrace Africa’s Tigere Property Fund, listed on the ZSE in November 2022, and the Revitus Property Opportunities REIT Fund, listed in December 2023. The Tigere Property REIT declared a full-year dividend of US$1.05 million for its first full year of trading.

There are five ETFs listed in the country, including the Old Mutual Top 10 ETF, Morgan & Co Multi-Sector ETF, DatVest Modified Consumer Staples ETF, Morgan & Co Made in Zimbabwe ETF, and Cass Saddle Agricultural ETF. The Zimbabwe Mercantile Exchange (ZMX), operated by Finsec, is the country’s sole commodity fund.

Fixed-Income Market and Derivatives

In the fixed-income space, the Karo Bond is available on the VFEX. Taruvinga expressed a desire to see government paper, such as Treasury Bills and Treasury Notes, traded on the market, as well as parastatal and municipal debt instruments.

The ZSE and VFEX have introduced “Futures” and “Options” trading as new derivatives. Since their launch in June 2023, the ZSE settled over 100 Futures contracts by the end of the year, with only about 30 positions in default due to margin call failures. Six Options contracts were settled, although high entry requirements limited their uptake.

Taruvinga emphasized the need for more products tailored for retail investors, including derivatives of agricultural commodities and gold coins issued by the Reserve Bank of Zimbabwe. Actuary and managing director of Conceptual Fund Managers, Gandy Gandidzanwa, noted that the lack of exposure to more complex financial structures is affecting the growth of local capital markets.

Regulatory Framework and Innovation

The local capital markets operate under the Securities and Exchange Act (Chapter 24:25), enacted in 2004 and revised in 2013. Taruvinga highlighted the need to update the regulatory framework to accommodate new financial products and innovations. SECZ plans to establish an innovation office or regulatory sandbox to allow for experimentation with new financial products.

Supporting Small and Medium Players

Concerns have been raised about the current capital adequacy framework burdening small and medium securities market intermediaries (SMIs). SECZ prudential supervision and surveillance officer, George Nhepera, acknowledged the negative impact of the operational risk calculation rule on small and medium SMIs and suggested a review to reduce the financial burden on these entities.

Overall, Zimbabwe’s capital markets are evolving, with efforts to diversify offerings and improve regulatory frameworks. However, challenges remain, particularly in providing opportunities for small and medium players and ensuring the depth and breadth of market products. – Sunday Mail